Where now for FANG stocks?

Tech suffers as value surges

Yesterday’s remarkable bounce in stock markets saw one big area left out of the party. Tech stocks suffered a poor day, with the Nasdaq 100 reversing on the day having leapt higher along with everyone else.

On many measures, high-growth names suffered their worst performance in months. FANG stocks, for so long the big winners, saw their worst day against the ‘average’ S&P 500 stock in four years, with a gap of almost 8%, while the Dow Jones enjoyed its best performance against the Nasdaq in twenty years.

The big winners from Monday’s soar away gains were those sectors that have suffered most in recent months, such as banks, travel stocks and energy names. These sectors have suffered heavily thanks to expectations of weaker demand for holidays, a drop in oil consumption and record-low interest rates. The vaccine news suggests that there will be some reversal in each of these trends, even if that reversal is some way off.

Is that it for FANG stocks?

As is the way of markets and the financial media, there was no shortage of commentators willing to declare the great ‘long FANG’ trade dead. On a short-term time frame, it does look like the big post-March rally in these stocks is at an end. But even on a five-year time frame yesterday’s weakness barely even registers.

FANG was a popular trade long before Covid-19, and with good reason. These big tech stocks have been market stars for years, thanks to their commanding market share and impressive levels of cash generation. In a world of low yields, high-growth stocks have been very much in demand.

Growth vs value

Are things about to change? Is value finally due to catch up with growth in terms of performance? Certainly, a steepening yield curve would support the idea of stronger growth in the economy and higher inflation, which may drive investors towards other sectors than technology.

But to keep things simple, most trends go on much longer than anyone expects. We might finally be at the point where the big tech rally begins to weaken, but the tech giants are still compelling investments even in a changing world. It would be silly to cut them out of a portfolio now on one day’s worth of vaccine news. It would be even more foolish to begin shorting them without clear evidence of a deterioration in fundamentals and/or their current bullish price momentum.

Learn more about how to trade stocks